EFFECTIVE STRATEGIES FOR DEALING WITH PAY TRANSPARENCY DEMANDS

Transcription

1 EFFECTIVE STRATEGIES FOR DEALING WITH PAY TRANSPARENCY DEMANDS

2 In recent years, transparency has become a buzzword within the business world. More and more organizations are striving to become more transparent in a number of areas such as financial reporting and business relationships. The human resources function has also faced pressure to improve transparency in a number of areas, particularly ones related to executive pay. Below the executive level, there are increasing calls for greater pay transparency. For HR professionals and managers alike, these demands can be challenging and overwhelming. While transparency is ultimately meant to improve employees perspectives regarding pay equity, sometimes it can be difficult to determine the approach that will also minimize risk and ensure regulatory compliance. In this guide, we ll help you navigate the topic of pay transparency and make your organization better prepared to meet the demands of today s employees and stakeholders. Some of the topics we ll address include: What is pay transparency? How to address stakeholder demands What are the primary laws and regulations that protect pay equality? Where is pay transparency headed? What employers should do (and not do) to prepare How to factor in market pay How much transparency you should provide and how to achieve it We ll begin by discussing exactly what the term pay transparency really means. Let s get started! Copyright 2017 HRsoft Page 2

3 What Is Pay Transparency? At the basic level, pay transparency is the practice of providing clear insight as to how much employees are paid for the jobs they perform and how that pay is determined. There is, however, a more significant and powerful reason as to why pay transparency has become a hot topic. In many ways, pay transparency can be viewed as a means to an end, with the end being pay equity. Pay equity is a goal shared by employees and employers alike. To the extent an organization can practice and clearly demonstrate pay equity, the better off it will be in attracting, retaining, and motivating employees. Becoming an employer of choice or a best place to work with the ability to hire the best and the brightest can contribute positively to an organization s market reputation, its performance versus its peers, and the bottom line. What Else Is Driving Pay Equity? In addition to pay transparency, there are three other driving forces behind pay equity. These factors are: Inherent fairness Stakeholder demands Legislation and regulations Like pay transparency, each of these factors contributes towards improved pay equity for all employees. Let s take a closer look at these factors. What is Inherent Fairness? Defining fair can be tricky since fairness is often in the eyes of the beholder. Although people may disagree about how much pay is fair, there is an inherent belief that such a number can be identified once it is put into the right context. The meaning of fair as it relates to pay includes multiple perspectives such as gender equality, internal equity, and market value. The relative importance of each of these elements to an individual will shape one s definition of what is inherently fair. Regardless of one s personal perspective, the notion that a worker should receive a fair day s wages for a fair day s work is a long-standing principle that most people accept. Copyright 2017 HRsoft Page 3

4 Addressing Stakeholder Demands In recent years, shareholders of publicly traded companies have taken a keen interest in the matter of executive pay and have demanded and received some say in the matter. Job search websites like Glassdoor have furthered the demand for pay information beyond the executive level and into the general employee population by encouraging greater disclosure and sharing of wages and salaries. There are even websites that will provide you with basic information on typical pay levels for a number of popular jobs. As pay becomes more transparent and public, topics like the gender pay gap are thrust into the spotlight. Take for instance the U.S. Women s National Soccer Team and the U.S. Women s National Hockey Team. Members of both teams have recently exerted pressure to pay players the same as their male counterparts. Such instances have drawn greater attention to Equal Pay Day the day, usually in April, that signifies how far into the current year women must work to earn what men earned in the previous year. As we ve seen in recent years, it s important for companies to take action not just vocalize their support in complying with pay transparency demands. Thus, there are two critical actions to take away here. The first is that your organization s actions will ultimately determine your level of pay transparency. In other words, you must also walk the talk. Secondly, it s always best to be prepared for your pay decisions to be challenged. We ll cover some vital preparation strategies shortly. First, however, we ll take a brief look at how both past and more recent regulations have impacted the ways we determine pay. Legislation & Regulation One of the most challenging aspects of equal pay compliance is the fact that federal regulations are spread across a number of entities. These federal agencies include: the U.S. Department of Labor (DOL), the Equal Employment Opportunity Commission (EEOC), the Internal Revenue Service (IRS), and the Office of Federal Contract Compliance Programs (OFCCP). Each agency has its own set of regulations when it comes to pay. For a better understanding of how legislation impacts pay, let s take a brief look at the history of equal pay laws. Copyright 2017 HRsoft Page 4

5 The 1960s One of the most frequently cited federal pay laws is the Equal Pay act of 1963, which is actually an amendment to the Fair Labor Standards Act of 1938 the law that determines the federal minimum wage and overtime pay requirements. The amendment enforced equal wages between men and women in the same establishment, but as you can imagine, there tends to be some confusion surrounding this term. What, exactly, does the same establishment refer to? A few other aspects of the amendment are equally tricky to decipher. It cites that men and women who perform jobs requiring substantially equal skill, effort, or responsibility should not face gender-based wage discrimination. Again, the verbiage is less concrete than perhaps it could be, but as we ll discuss in an upcoming section, there are steps you can take to make sure you re erring on the side of caution with your pay strategy. Another well-known federal pay regulation is part of Title VII of the Civil Rights Act of In addition to prohibiting wage discrimination based on sex, it also provides protections based on race, color, religion, and national origin. Additionally, it covers all aspects of employment not just pay. In 1965, Executive Order was implemented. This order was passed to help protect the rights of employees who work for contractors and subcontractors with federal government contracts that exceed $10,000. The 90s to Now As you can see, wage discrimination was a central issue during the 1960s. Things were relatively quiet, however, until the 1990s. In 1997, the Paycheck Fairness Act was introduced, which would narrow and modify certain terms in the Equal Pay Act. It would also protect employees against retaliation for discussing pay with colleagues, and prohibit employers from using salary history during the screening or hiring processes. While it has been introduced in every session of Congress since, the bill has not been passed. In 2009, the Lily Ledbetter Fair Pay Act was enacted to extend the statute of limitations for equal pay lawsuits. Then, in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed. This law brought with it requirements for determining the CEO pay ratio and Say-on-Pay, which refers to stakeholders ability to weigh in on executive pay packages. More recently, a new set of overtime rules were introduced under the Fair Labor Standards Act, though the rules were quickly appealed and are currently on hold. However, it s important for HR professionals to recognize that the proposed rules opened up questions among employees about who s exempt and who s not, which has likely spawned other pay-related discussions. Copyright 2017 HRsoft Page 5

6 Where Is Pay Transparency Headed? Currently, the District of Columbia and 48 states (not including Mississippi and Alabama) have equal pay regulations. Thirteen states also have also introduced laws to enforce pay transparency protection. Most recently, Maryland, Delaware, and Massachusetts have enacted laws prohibiting employers from taking action against employees who discuss or disclose wages. These laws allow employees to discuss pay information without the risk of facing adverse action from their employers. Employers may also be prohibited from requiring employees to waive the right to discuss their wages. Keep in mind, however, that pay transparency laws do not require employers to disclose individuals pay information. Some cities are also developing their own pay regulations. Philadelphia recently became the first city in the U.S. to prohibit salary history inquiries during the hiring process, while New York City passed a bill prohibiting employers from doing the same during any stage of employment. New Orleans, Pittsburgh, and Washington, D.C., have their own laws as well. Some of these laws are under appeal so it is important for employers to monitor developments. While the primary intent of these laws is to make the workplace fairer for everyone, they may also make HR s job more diffi cult. According to a HRsoft poll, 52% of respondents said they were most concerned about all three of the following: federal, state, and local pay-related legislation; versus any one or two of these areas alone. If this applies to you, you re in the right place. Next, we ll discuss what employers could consider doing (and not doing). Copyright 2017 HRsoft Page 6

7 What Employers Should Do (And NOT Do) Since pay regulations vary by location it s important to know the different laws. In addition, here are a few best practices for employers to consider. Know the Lingo Pay equity terminology can differ significantly from one law to the next. Terms like substantially equal, equal, similar, and comparable are found throughout the legislation, but it doesn t mean their definitions are interchangeable. Each term has its own unique meaning and application. Avoid Using Pay History As we ve seen, a growing trend in many areas is the prohibition of using pay history to determine a new hire s starting pay level. You can stay ahead of any potential legislation that could eventually affect your organization by discontinuing this practice now. Pay Employees at or Above Minimum Paying employees below the minimum of the pay range for their jobs puts employers at high risk for pay equity claims. Make sure you can afford to pay employees the minimum (at the very least) before hiring someone new. In addition, make sure new hires meet job requirements. If they do, don t let their pay history fool you into paying them below minimum. The money you save can be lost fivehundred fold in a pay discrimination law suit. Copyright 2017 HRsoft Page 7

8 Have Defined Pay Criteria Avoid making pay decisions on a case-by-case basis. It s best to have defined criteria and written guidelines, and to follow them. Any exceptions to those criteria should also be clearly documented. Establish Checks and Balances A manager s input may be one of the most important factors determining an employee s pay, but avoid giving managers complete discretion when it comes to starting pay amounts, raises, and promotions. Instead, implement a system of checks and balances to avoid personal biases and ensure consistency across business groups and functions. Develop a Stated Compensation Philosophy and Strategy Make sure your organization has a written philosophy and strategy on pay. This should encompass starting pay, pay increases, bonuses, and all other aspects of compensation. Also make sure that managers and supervisors have a copy and understand it. Refine Your Pay-for-Performance Approach If your organization uses performance-based pay, make sure you are defining the criteria used to measure performance. Employees want to know how they are doing relative to those criteria and managers must be able to justify their performance rating decisions. Pay-for-performance is as much about performance as it is about pay. Copyright 2017 HRsoft Page 8

9 What About Market Pay? By this point, you may be wondering how market pay factors into pay equity. According to a HRsoft survey, 63% of respondents use market pay data as a guideline for making pay decisions, while also considering other factors. A quarter of respondents use it as the sole factor. Relying exclusively on market pay to make pay decisions carries with it some risk. Using market pay is perfectly legal, but opposition to this approach may intensify over time. One reason is that male-dominated jobs tend to be paid higher than female-dominated job. Thus, using market pay could perpetuate pay disparities because market data shows a historical bias in favor of males. With the spotlight on the gender pay gap, relying exclusively on market pay could mean treading into dangerous territory. If you re like the majority of organizations that still find market pay to be one of the most convenient and trustworthy sources for helping you make compensation decisions, here are a few guidelines to consider: Use multiple compensation survey sources and make sure they re credible. Document job matches and have them reviewed by multiple parties. Never rely on one person s opinion alone. Once you establish a market reference point, make sure that it is applied without gender or other bias. When making pay-related decisions, consider implementing a plan, system, or process through which you can account for factors other than the market. Some variables to look at are skill, effort, responsibility, working conditions, seniority, and performance. Remember to evaluate jobs not people which can be particularly challenging in cases of singleincumbent jobs. Review and test compensation programs, processes, and results that were developed based on market data. Check carefully to make sure there are no systematic biases or unexplained gender-based correlations. Copyright 2017 HRsoft Page 9

10 How Much Transparency Do You Need? The answer to this question will vary from organization to organization, depending on things like philosophy, strategy, and culture. Generally speaking, sharing more information about how pay decisions are made is better than sharing less. When employees understand how their pay is determined and what they need to do to earn more, they tend to respond positively and perform accordingly. How to Improve Your Pay Transparency If you think your pay transparency could be improved, start by looking at your compensation philosophy and strategy. If you don t have one yet, now is a great time to create it. Make sure it reflects your current business strategy, aligns with your pay programs, and that employees will be able to understand how their actions influence their compensation. It s also a good idea to think about implementing a specific pay transparency policy. You ll want to take a look at who makes decisions about pay, who informs employees about pay changes or incentive payments, and who will respond to questions about pay from employees. You may need to implement the policy in several stages. Your organization s ability to pay fairly hinges largely on your compensation communications. Thus, it s critical to revisit communication channels, as well as the topics you ll need to cover. For instance, in addition to base pay, you might also want to communicate details surrounding both long-term and short-term incentives. Remember, base pay is only one piece of the puzzle; making it fit well into the total rewards strategy is crucial. Also, pay communications don t have to consist of a once-a-year conversation. Train managers on how to hold engaging and insightful conversations with employees about pay. Make sure the information they re providing is accurate, authentic, and in line with your organization s compensation philosophy and strategy. You can offer some sample scripts or questions and answers for particularly challenging topics. Copyright 2017 HRsoft Page 10

11 Summary Now that you have a firm idea of where the business landscape is headed in terms of pay transparency and pay equity, you can begin taking the steps to ensure your organization is prepared for the future. By following the tips listed in this guide, your organization will be better prepared to meet increasing pay transparency demands. For a brief review, here are the key concepts covered in this guide: Pay transparency is a means for achieving pay equity by making information as open and accessible as possible. There are other factors that influence pay equity the concept of inherent fairness, ongoing stakeholder demands, as well as changes in regulations and legislation. In recent years, stakeholders have taken a keen interest in pay levels. As topics like gender pay inequality in sports and Equal Pay Day generate increased publicity, organizations pay decisions are coming into question more frequently. Many of today s equal pay laws were developed in the 1960s. From then until the late 1990s, there was little legislative activity. Some states and cities have taken up the pay equity cause by passing their own local laws that can vary by location. By taking note of pay transparency trends, organizations can prepare themselves for the future. For instance, a number of cities have enacted legislation prohibiting employers from basing starting pay on a candidate s salary history. Copyright 2017 HRsoft Page 11

12 It may be prudent to adopt this practice across business locations as a proactive step in ensuring compliance with future pay laws. Having a stated compensation philosophy and strategy is one of the most important ways to promote pay equity. Some additional tactics include defining and measuring performance, paying employees at or above the minimum of the pay ranges for their jobs, establishing some checks and balances around pay decisions, and basing pay decisions on factors other than market data alone. Determining how much pay transparency your organization should provide depends on your specific needs and objectives. It s important to align your organization s pay transparency policy with its compensation philosophy and strategy. You can improve your pay transparency by training managers on carrying out pay conversations and communicating compensation-related information more widely throughout your organization. While the new world of pay transparency may require some adjusting to, employers and employees alike may benefit from the heightened level of visibility. In being more forthright and open about pay decisions, you can demonstrate to your employees your organization s commitment to fairness, which will ultimately help foster a culture of dedication and excellence. Copyright 2017 HRsoft Page 12

13 Resources HRsoft is a cloud-based, High Impact Talent Management software company that specializes in improving employee engagement and retention for mid-large sized employers. Our High Impact Talent Management System includes modules for compensation management, applicant tracking, management software, total rewards, stay interviews, and content management. Phone: info@hrsoft.com Web: About the Author Tom Burke Principal & Global Practice Leader, Conduent Tom Burke is a Principal and the Global Leader of the Career Consulting Practice at Conduent Human Resource Services. In this role, Tom serves as the leader of the firm s consulting services associated with compensation and talent management. He is accountable for client and employee satisfaction and retention, business development and growth, oversight of projects and client relationships, staffi ng, team collaboration, as well as resource and financial management. Tom holds a B.A. degree in Economics from Duquesne University and has more than 30 years of consulting experience. Copyright 2017 HRsoft Page 13